The roots of Egyptians' rage can be traced back to bad economic advice from the IMF -- and the crony capitalism it left behind.

By Ty McCormickTy McCormick is an associate editor at Foreign Policy. Previously he was a freelance correspondent in Egypt, where he wrote about everything from military trials to revolutionary rap music. A 2011 Pulitzer Center grantee, he has written for Newsweek, the New Republic, the International Herald Tribune, and the Los Angeles Times, among others. He has also appeared as a commentator on Fox News and American Public Media’s Marketplace Tech. He holds a bachelor’s degree from Stanford University and a master’s from the University of Oxford, where he was a Clarendon scholar.

It was 1990, and President Hosni Mubarak’s Egypt was in turmoil. The statist economic order built by former President Gamal Abdel Nasser had come apart at the seams: Egypt’s banks were failing, inflation hovered around 20 percent, and — following the collapse of the Egyptian pound on the international currency markets — Egyptians had begun hoarding American dollars. Mubarak also had to contend with tanking oil prices, which impacted both exports and remittances from the Gulf, and a dangerous upsurge in terrorist attacks. The assassination of Rifaat al Mahgoub, speaker of the Egyptian People’s Assembly, as well as two horrific attacks against Israeli tourists (one between Cairo and Ismailiya and one on the Egyptian-Israeli border near Eilat) in 1990 alone called into question the proficiency of the state’s security forces and resulted in aprecipitous decline in tourism revenues. Egypt’s economy — based on subsidies, bureaucracy, and a bloated public sector — was limping feebly toward the 21st century.

Revolution, it is often said, appears impossible before it happens — just as afterwards it seems inevitable. For the young revolutionaries that powered Egypt’s Jan. 25 uprising, the tipping point must have felt like magic. (Indeed, Alaa Al Aswany, a noted Egyptian writer and activist, describes it as a "miracle" in the forward to his most recent book, On the State of Egypt.)But the chapter between impossible and inevitable in Egypt’s history is rather more prosaic — less celestial, more terrestrial. That chapter — and the beginning of the end for Mubarak — starts with the economic crisis of 1990.

Iraqi President Saddam Hussein’s invasion of Kuwait in August of that year seemed to provide the Egyptian strongman with an answer to his financial woes. In exchange for lending diplomatic and military support to the U.S.-led coalition formed to oppose Iraq’s aggression, Egypt received a "bonanza of economic rewards," as Bruce Rutherford, an assistant professor of political science at Colgate University, writes in Egypt After Mubarak: Liberalism, Islam, and Democracy in the Arab World. Loans from the United States and the Paris Club, an informal group of private creditors from 19 of the world’s biggest economic powers (12 of which sent military personnel to aid the U.S. invasion of Iraq), were written off and Egypt was showered with some $15 billion in emergency economic assistance. Mubarak, it seemed, could not have played his cards any better.

The aid, critical though it was to reviving Egypt’s failed banking sector and stabilizing the economy, contained the seeds of Mubarak’s eventual destruction. Conditioned on a demanding International Monetary Fund (IMF) restructuring program, the loans required that Mubarak cut government services, liberalize interest rates, and undertake an ambitious privatization program. They required, as Dina Shehata, a senior researcher at the Al-Ahram Center for Political and Strategic Studies, has argued, that Mubarak break "Nasser’s bargain" — a promise to provide social services, employment, subsidies, education, and health care in exchange for exercising total control of the political environment.

Taking a longer view of events that led to the Jan. 25 revolution does not deny the importance of immediate catalysts such as the fraudulent 2010 parliamentary election or the murder of Khaled Said, a blogger who was beaten to death by police officers and for whom a Facebook page calling for the revolution was named. Nor does the focus on material well-being obscure the role of existential factors — freedom, dignity, justice — that inspired Egyptians to risk their lives for political change. But the gradual deterioration of economic conditions in Egypt throughout the 1990s and early 2000s coupled with the rise of an independent labor movement — one that played an important if not critical role in Egypt’s 18-day revolution — suggests that a longer reading of history might reveal the origins of Mubarak’s fall. After all, as Robert Zaretsky, a professor of history at the University of Houston, recently observed in Foreign Affairs, "pyramids crumble slowly." Perhaps so did the man who many Egyptians joked might someday build his own.

The liberalization experiment

From a macroeconomic standpoint, liberalization was a resounding success. Egypt’s economy, which had shrunk by 2 percent in 1990, was growing at a healthy 5 percent by 1996. Inflation, which had exceeded 20 percent in the late 1980s, was down to 7 percent, and investor confidence had recovered. Ten years later, Egypt would be named the IMF’s "top economic reformer," recording a bullish 7 percent GDP growth for 2007. "Egypt’s economy had another year of impressive performance supported by sustained reforms, prudent macroeconomic management, and a favorable external environment," concluded the IMF report from that year, which heaped praise on the "reformist cabinet" for pressing ahead with adjustments despite vocal opposition, "fuelled in part by high food-price inflation and some frustration about the lag in the ‘trickle down’ of the benefits of growth."

But for many Egyptians, the lack of "trickle down" at all was the story. Impressive growth numbers, from their perspective, simply meant layoffs, pay cuts, forced early-retirement schemes, and the loss of benefits. The impact of reform on employment was so pernicious, in fact, that Stella, Egypt’s local beer, and Coca Cola were the only two cases where privatization led to an increase in the number of jobs, according to Joel Beinin, a professor of Middle East history at Stanford University. Yasar Jarrar, a partner at PricewaterhouseCoopers in Dubai and a panelist at a recent World Bank conference on investing in the wake of the Arab Spring, put it this way: "you had to be a macro-citizen to benefit" from economic liberalization.

Membership in the World Trade Organization (WTO) in 1995 only made things worse for many Egyptian laborers, as reduced tariff and nontariff barriers impeded the state’s ability to protect certain labor-intensive sectors. Egyptian textiles, an industry that dates back to the age of the Pharaohs, suffered mightily as Chinese and Southeast Asian producers took advantage of reduced tariffs to expand their market share. There was little doubt beforehand about how this would impact the Egyptian labor force: One USAID report in 2004 projected that the textile industry would lose 22,185 jobs and about $203.9 million in shipments, a figure that represented roughly 4 percent of the country’s non-oil sector exports.

Those firms that did benefit from liberalization and WTO membership, moreover, only serviced a tiny fraction of the Egyptian populace. These firms, owned by a small number of families close to the regime, dealt primarily in construction materials, export/import, tourism, real estate, food and beverages, and high-end consumer goods that the majority of Egyptians could not afford, according to Tim Mitchell, a political economist at Columbia University. As Mitchell argued in the Middle East Report in 1999, the "major impact [of the state’s neoliberal program] has been to concentrate public funds into different, but fewer hands. The state has turned resources away from agriculture, industry and the underlying problems of training and employment. It now subsidizes financiers instead of factories, speculators instead of schools."

As the IMF-led reforms progressed, laws were enacted to protect laborers from the potentially harmful side effects of liberalization, but there was often "a lack of popular or political will to enforce them," Rutherford told me in an interview. The result was that "tens of thousands of workers lost their jobs and access to subsidized housing."

At the same time, across-the-board subsidy cuts dictated by the IMF restructuring program further eroded "Nasser’s bargain" with the people and compounded the plight of working class Egyptians. Although bread subsidies remained intact — a near revolution in 1977 after President Anwar Sadat tried to revoke them was enough to keep them off the chopping block this time around — the number of subsidized household items was slashed from 18 to 4 (bread, wheat flour, sugar, and cooking oil), according to Rutherford. But retaining bread subsidies wasn’t enough to keep Mubarak’s dimuqratiyyat al-khubz — or "democracy of bread," as the Tunisian scholar Larbi Sadiki once described it — from collapsing. When world grain prices spiked between 2007 and 2008, the price of bread increased as much as fivefold in private bakeries, meaning that many Egyptians who did not ordinarily rely on subsidies could no longer afford to eat. The country subsequently erupted into "bread riots" that raged until the army took over the baking and distribution of bread. In the aftermath of the riots, bread became a "symbol of defiance," as journalist Annia Ciezadlo has argued. It represented both the regime’s broken promises and the yawning gap between Egyptians’ expectations and the reality they faced.

World Bank numbers paint a sobering portrait of that reality: Between 2000 and 2008 (the only dates for which statistics are available) both urban and rural poverty rates increased, with rural rates spiking from 22.1 to 30 percent. The official unemployment rate — often criticized for being artificially depressed — rose from 8.9 percent to 9.2 percent during the same period, although it reached as high as 11.4 percent in 2005. The long view from 1990-2008 reveals an equally telling 1.2 percent rise in joblessness. Meanwhile, the income share of the top 10 percent of wage earners increased between 1990 and 2008, and the top 1 percent made out like bandits. As Ossama Hassanein, senior managing director of Newbury Ventures and a business school professor at the American University in Cairo, told me, roughly 200 families managed to abscond with 90 percent of the country’s wealth.

While Egypt’s rich and poor were being wrenched in opposite directions, something new began to emerge out of the chaos. Workers started to organize. They held strikes and tentative protests, and before long Egypt had given birth to an independent labor movement — one that was coalescing outside of the strictly monitored worker’s federations, unions, and syndicates that had previously doubled as tools of government control.

Labor rears its ugly head

The labor movement caught like wildfire. Between 1998 and 2011, Egypt experienced 3,500 protests and labor strikes that mobilized more than 2 million workers, according to Beinin. The bulk of these protests occurred after 2004, when a new government, known as "the government of the businessmen," came into power. Led by Mubarak’s son, Gamal, and a number of his business associates, such as steel tycoon Ahmad Ezz and economists Hussam Badrawi and Mahmud Mohieldin, the new government "privatized more in terms of total asset value in their first year in office than had been sold off in the previous 10 years," Beinin noted in a recent interview with Stanford’s Center for the Humanities. "Almost immediately in the second half of 2004, you see a big spike in the number of strikes, sit-ins and other kind of workers’ collective actions," said Beinin.

Most of the protests were directed at securing better wages and protecting workers from the mass layoffs that often (illegally) accompanied privatization. Protests at the Qalyub Spinning Company erupted in 2005, for example, after the mill’s sale to a private investor led to widespread speculation about layoffs and wage-reductions — speculation that was not at all unfounded given the record of Qalyub’s parent company, ESCO, in previous privatizations. According to a 2005 report published by Beinin in the Middle East Report, the six ESCO companies that had been privatized before Qalyub went from employing a total of roughly 24,000 employees in 1980 to 3,500 employees in 2000.

More strikes and sit-ins occurred in 2007 at the Mansura-Spain textile factory in Dakahlia, east of Cairo, and still more in 2006, 2007, and 2008 at the Misr Spinning and Weaving Company in Mahalla al-Kubra. Labor unrest was by no means confined to the textile sector: air traffic controllers, railway engineers, and oil and gas workers all went on strike at various times over the last decade. By the eve of the revolution, labor unrest was so commonplace that even the sleepy desert campus of the American University in Cairo, where I was working at the time, had seen workers strike on more than one occasion. To the careful observer, therefore, the events of Jan. 25 should have seemed more a natural progression of things than a decisive break with the past. As Khaled Khamissi, author of the best-selling novel Taxi, put it: "There is continuity between those strikes [of the last decade] and the 2011 revolution."

It is, of course, impossible to trace a direct line between the gradual evolution of Egypt’s labor movement and the ad-hoc decision by young people to protest the National Police Day on Jan. 25. Ahmad Maher, one of the founders of April 6, has even disputed the notion that workers played a significant role in the protests that toppled the Mubarak regime. But the origins of April 6 — a protest that included tens of thousands of students, unemployed Egyptians, and textile workers in Mahalla al-Kubra — suggests otherwise. As Tarek Masoud, an assistant professor of public policy at Harvard’s Kennedy School of Government, put it recently in the Journal of Democracy, "It is part of the genius of the April 6th Movement… that they were able to yoke labor’s newfound militant energy to the national drive for democracy." In Tahrir Square, that energy took the form of slogans that linked politics with the same basic concerns that had driven workers to protest time and again over the last decade. "They are eating pigeon and chicken and we are eating beans all the time," went one of the revolution’s refrains. "Oh my, 10 pounds can only buy us cucumbers now, what a shame what a shame."

A look at the young revolutionaries’ initial demands also reinforces the link between the Facebook-generation activists and their intellectual forebears. In addition to demanding the dismissal of Interior Minister Habib El-Adly, the end of Egypt’s infamous emergency law, and presidential term limits, protest organizers had a fourth demand: the implementation of a fair minimum wage, which last January was a meager 118 Egyptian pounds per month, roughly $20. This is a demand that had been made time and again by labor agitators over the last two decades.

Workers also played a direct role in toppling the Mubarak regime earlier this year. A sampling of headlines from the New York Times, NPR.org, and Al-Ahram, Egypt’s state-owned newspaper, in the three days leading up to Mubarak’s ouster yields the following: "Labor Actions in Egypt Boost Protests," "Labor Strikes Add to Pressure on Egypt’s Leaders," and "Egyptian workers join the revolution." Thousands of laborers had participated in the uprising on an individual basis, but their decision to launch organized strikes on February 9 and 10 may well have solidified Mubarak’s fate.

Labor unrest born of decades of economic hardship, however, was not the only way the economic restructuring that began in 1990 shaped the outcome of the 2011 revolution. The decision to open Egypt’s economy also set Mubarak’s government on a crash course with the military.

Sizing up the military

Egypt’s armed forces, which have maintained close ties to the presidency ever since the Free Officers’ coup of 1952 that brought Nasser to power, remains something of a mystery to those outside its ranks. "It’s amazing how little we know about the military," said Rutherford, referring Egypt’s longstanding tradition of shielding the army’s financial dealings from public or parliamentary view. What we do know is that it controls a substantial portion of the Egyptian economy. Estimates of the military’s economic empire — comprised of dozens of hotels, resorts, and manufacturing plants — run from 5 percent to 40 percent of GDP.

As the proprietor of public sector firms that enjoy a number of advantages over the domestic competition, including tax exemptions and conscript labor, the military has little to gain from market liberalization. As Rutherford explained, "If you open up the market, that cuts into the market that the military is selling to. And the military can’t compete with Asian and South Asian actors." It isn’t altogether surprising therefore that a 2008 U.S. Embassy cable published by WikiLeaks concluded: "We see the military’s role in the economy as a force that generally stifles free market reform by increasing direct government involvement in the markets…. Most analysts agreed that the military views the [Government of Egypt]’s privatization efforts as a threat to its economic position, and therefore generally opposes economic reforms."

The Mubarak regime’s increasingly cozy relationship with real estate tycoons also rankled top military officials, who "viewed Mubarak’s policy of selling land to developers at low rates as inimical to their interests," according to Harvard’s Masoud. As Egypt’s single largest land developer, the military has faced increased competition from private businessmen like Hisham Talaat Moustafa, a real estate mogul who was convicted last year of murdering his girlfriend, a Lebanese pop star, who have cashed in on the rapid expansion of Egypt’s capital city.

While liberalization and cronyism were cutting into the military’s bottom line, Gamal Mubarak appeared to be positioning himself to succeed his father. In 2002, Gamal was appointed general secretary of the ruling National Democratic Party’s Policy Committee, and in 2006 he became the party’s deputy general secretary, a role that many speculated would launch him into the presidency. As the ringleader of the "government of the businessmen" and the source of many of the pro-business reforms, Gamal represented a two-pronged threat to the country’s military establishment: Ideology and military allegiance — or lack thereof. A banker who believed in free-market liberalism, his policies would continue to erode their economic interests, and as Egypt’s first civilian president, he would effectively pry the military away from the presidency. Steven A. Cook, a senior fellow for Middle Eastern Studies at the Council on Foreign Relations and the author of the forthcoming book The Struggle for Egypt: From Nasser to Tahrir Square, put it this way: "You got the impression before the revolution that the military was very uncomfortable with [the succession] idea. Now they are very forthright about their distaste for it."

As late as Dec. 25, 2010, the younger Mubarak was still bullish on liberalization. "We need to immediately start a second wave of reforms… that are more ambitious and more daring," he proclaimed at the annual conference of the ruling National Democratic Party in Cairo. When anti-Mubarak sentiment hit a flashpoint a little more than a month later, in February, the military had few reasons to stand behind a regime that would be inherited by Gamal, and plenty of reasons to let it fall. By sending Mubarak packing to Sharm el-Sheikh and effectively ending discussion of a Mubarak dynasty, the military was able to assume control of the reform agenda, thereby protecting its economic interests, while also maintaining its image as the "guardian of the revolution."

The Supreme Council of the Armed Forces (SCAF) — the military junta now governing Egypt — has since indicted a number of the most prominent figures in Gamal’s inner circle, including former finance minister Youssef Boutros Ghali and former trade minister Rashid Mohamed Rashid. Perhaps this decision was simply one of expedience. After all, Ghali and Rashid are both supremely unpopular these days as a result of their association with the younger Mubarak. But as one source that has had frequent contact with Egypt’s business elite over the last decade suggested, it might have been a little more personal. "The military has taken the opportunity to set these guys on the run — a little bit of retribution — because they were really pushing to open up the economy in ways that would hurt their interests," said the source, who asked to remain unnamed. Either way, it seems unlikely that many at SCAF headquarters lament the fact that the "government of the businessmen" won’t be reconstituted anytime soon.

Peering into the future

Though Egypt’s tight-lipped generals are in their sixth month at the helm, they have given few clues about where Egypt’s economic policy is headed. Of the three publicly available communiqués issued by SCAF, none deals directly with the subject. Moreover, the process of passing a budget earlier this summer — which involved rejecting IMF loans before quietly accepting $2 billion from the World Bank — has left us with more questions than answers. It is obvious that SCAF "doesn’t want to be seen as pursuing Gamal’s vision," as CFR’s Cook told me. But to what extent it is actually willing to reverse the trends of the last decade remains to be seen. Beyond sacking Mubarak and his cadre of reform-minded cronies, SCAF has not, in Cook’s words, "fundamentally altered Egypt’s economic policymaking."

Still, SCAF’s decision to pass up IMF dollars in favor of soft loans from Saudi Arabia and other Persian Gulf states — loans that come without the kinds of fiscal-policy prescriptions that contributed to Egypt’s current predicament — makes clear that neoliberal advice has fallen out of favor. The biggest question that remains unanswered, though, is what role the military will play in setting policy after this fall’s parliamentary election, which is expected to usher in a new civilian government. Preferring, as Cook puts it, to reign without directly governing, the military is likely to concede many of government’s quotidian requirements to elected officials. But nobody expects Egypt’s generals to allow their economic interests to slip too far beyond their control. Why stop now? What remains to be seen is whether they can reverse joblessness and poor living conditions — the harbingers of Tahrir Squre — without dipping into their coffers. The answer to that, however, is not eminently clear.